It is quite astonishing, really, how little the federal banking regulators have clued Congress in on the whole Basel international capital plan. You would think such a comprehensive set of regulations that will literally transform the entire structure of the U.S. banking industry would benefit from meaningful consultation with the people who make the laws. Unfortunately, the regulators seem to have adopted the same attitude toward Congress and Basel III as they followed with Basel II: This is our business; we know what we're doing. Or so it would appear.
Much to the surprise of everyone other than the regulators involved in drawing them up, the proposed rules would extend to every single bank in the country, regardless of size, charter or business model. What began as an effort to create a one-size-fits-all set of standards for global banks involved in international commerce was converted on this side of the Atlantic into a one-size-fits-all plan for banks in Appleton, Wis., Brewton, Ala., Tyndall, S.D., Jacksonville, Texas and everywhere else that will vote for congressional representatives this November.
As a result, we see Congress almost begging the regulators for information on what the proposed capital plan involves and what the regulators have done to analyze the impact of Basel on the communities where Senators and congressmen and their constituents live. Things like the availability of credit and other financial services to local businesses, the impact of the rules on a struggling housing and mortgage market and the viability of local banks matter to the people who have election certificates.
Not that Congress is eager to set capital rules, or that anyone would ask them to do so. But Congress is legitimately interested in the impact of major regulatory changes, and no financial regulatory proposals in recent memory would be as fundamentally transformative as the Basel capital rules. When the state banking regulators announced on Oct. 3 "we are opposed to the proposed approach put forth by the federal banking agencies to implement the Basel III capital accord," senators and representatives felt comfortable asking "What gives?"
The calls from the Hill have been delivered to the regulators in various formats. There have been inquiries from individual legislators. One letter signed by 53 senators expressed the worry that the proposals could result in community banks "reducing lending and economic growth in the communities in which they serve."
Several entire state delegations have weighed in, including all 10 members of the Maryland delegation, who wrote, "we strongly encourage you to avoid needless complexity and consider the impact any new framework will have" on the banks, consumers and businesses back home. Leaders in the House and Senate have expressed their concerns, and public hearings are being contemplated.
The congressional queries carry a common theme. Adequate levels of high quality bank capital are good, but do you need all of these other complex provisions to achieve that?
At last count well more than a thousand individual, specific comment letters have been filed by the bankers themselves, each describing how the proposals would affect their own bank and their customers. Invited or not, Congress is in on the game now.
As the regulators consider the comments, as they weigh the real-life impact of the Basel proposals on hometown America, it would be well to involve Congress in the reconsideration.
Few legislators will have much appetite for setting bank capital policy, but it would be a gross error to mistake that discretion for lack of interest in what those policies will do to local economies.